Boring Portfolio

<THE BORING PORTFOLIO>
Boring Takes You to School
Are you ready?

By Alex Schay (TMFNexus6)

ALEXANDRIA, VA (April 30, 1999) -- Educated human capital. What a marvelous euphemism used to describe increasingly well trained people in the workforce. The emergence of Drucker's post-capitalist "knowledge worker" has really been witnessed by the for-profit education segment over the last eight years. The University of Phoenix, which currently serves 65,000 "students" -- all of whom are at least 23 and working full time -- is owned by education holding company Apollo Group (Nasdaq: APOL). It, and Washington, D.C.-area operator Strayer Education (Nasdaq: STRA) are both on this Boring Fool's radar.

As it happens, Apollo moved up sharply today, from $1 1/8 to $24 3/4, which is a rather uncharacteristic trading pattern for these well-followed, staid companies. Both of these firms are extremely interesting for the long term, so I'll write a little bit about them today.

Once students are recruited by a public post-secondary institution, they represent a recurring, predictable revenue flow -- and most companies in this segment, even halfway through their fiscal year, can already discern roughly 70% of their year-end revenues. This, as well as the tremendous operating leverage the segment offers (due to the number of students in a classroom being spread out over largely fixed costs), will continue to attract investors to the business. Overall though, when a company like Apollo can generate an internal rate of return on its new units of 95%, and a consistent return on invested capital of approximately 40%, long-term investors tend to perk up.

Apollo shares have been weighed down for months not only by a Department of Education investigation (which makes its operating performance all the better considering the costs), but also by unwarranted concern surrounding a moderating growth rate in enrollment from an uncharacteristically high rate in 1998. The important trends though, with respect to the long run dynamics of the business, are still very firmly in place.

Education seems to be one of those areas ripe for the kind of disintermediation that only the Internet can bring. After all, with the excellent communications technology offered by companies like Centra Software, it would seem that any group around the world could interact in a suitably efficient manner conducive to education. As it stands now, both Strayer, through Strayer Distance Learning, and Apollo (with University of Phoenix Online) have both capitalized on the opportunity. In the future, though, its expected that a raft of online pure-plays will hit the market and ultimately expand the overall market.

The career-focused strategies with up-to-date curriculums have resulted in placement rates of 90-95% for graduates. The schools actively work with companies to tailor their studies to the requirements of today's jobs. In addition, most of the for-profits are more efficient. Traditional providers use 6 times more space per student and instructors actually teach 30% less than teachers at for-profit providers. The Information Technology Association of America estimates that there are 375,000 open IT positions right now and the number of degrees conferred upon technology graduates in traditional institutions has declined 50% in the last ten years, creating a wide-open opportunity.

Strayer certainly has capitalized with 71% of its enrollees coming from the working adult population. Over 50% of those people are pursuing an associate's, bachelor's, or master's degree in information technology. Overall, the U.S. Bureau of Census estimates that approximately 75% of students over the age of 24 currently work while attending school. The National Center for Education Statistics (NCES) estimates that, by the year 2002, the number of adult students over the age of 24 will increase to 6.3 million, or 41.5% of the 15.2 million students projected to be enrolled in higher education programs. Demand for post-secondary education is expected to increase in conjunction with the 20% increase in the number of new high school graduates -- from approximately 2.5 million in 1994 to 3.0 million in 2005 (as projected by the National Center for Education Statistics).

O.K., enough statistics, suffice it to say that a lot of the demand-side trends are going to be in place for a while. Post-secondary education offers high barriers to entry for the degree-granting companies, and is part of the rationale for the premium valuations they are awarded. In fact, it can take two to three years just to get a state license and, after that, six to seven years to become profitable. As high-quality for-profit companies continue to penetrate various state markets, the fear factor with respect to the quality of the education they provide will continue to decline. The Internet has also made the ability to constrain the for-profits difficult, in terms of looking at the segment by strict state boundaries. The states have found that these companies are easier to regulate by letting them in rather than keeping them out. Next week I'll take a closer look at some of the valuations. Have a great weekend.

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04/30/99 Close
Stock Change   Bid
APCC  +  3/8   33.00
BRKb  +5       2470.00
CSL   +  1/2   49.00
CSCO  +4 7/8   114.06
GTW   -  7/16  66.19

                  Day     Month   Year  History
        BORING   +1.85%   4.62%   4.91%  40.86%
        S&P:     -0.57%   3.79%   8.94% 122.14%
        NASDAQ:  +0.57%   3.29%  15.97% 144.28%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    114.06   376.14%
  8/13/96  200 Carlisle C    26.32     49.00    86.14%
  4/20/99  230 American P    28.95     33.00    13.98%
 12/31/98    8 Berkshire   2244.00   2470.00    10.07%
   2/9/99  100 Gateway 20    72.38     66.19    -8.55%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  25664.06 $20274.07
  8/13/96  200 Carlisle C  5264.99   9800.00  $4535.01
 12/31/98    8 Berkshire  17952.00  19760.00  $1808.00
  4/20/99  230 American P  6659.25   7590.00   $930.75
   2/9/99  100 Gateway 20  7237.50   6618.75  -$618.75


                             CASH    $999.27
                            TOTAL  $70432.08

</THE BORING PORTFOLIO>